Burkina Faso: Risk Assessment
Country Risk Rating
|C||A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.|
Business Climate Rating
|C||The business environment is difficult. Corporate financial information is often unavailable and when available often unreliable. Debt collection is unpredictable. The institutional framework has many troublesome weaknesses. Intercompany transactions run major risks in the difficult environments rated C.|
Growth vulnerable to commodity price movements
Growth was hit in 2014 and 2015 by the drop in commodity prices, as it is dependent mainly on gold and cotton production, which represents more than 80% of export income. It is, however, expected to rebound in 2016: despite the weak prices, gold production should hold up thanks to the issuing of several mining permits to foreign companies, suggesting that production could start at these mines during 2016. Furthermore, the new mining code adopted in June 2015 clarifies the regulation of the sector and includes provisions for the creation of a fund devoting 20% of the state’s mining revenues and 1% of the turnover of local mining companies to support local development plans. The cotton sector is also expected to remain dynamic thanks to productivity improvement through increased mechanization, the development of irrigation and the introduction of genetically modified seeds which are more resistant to drought and parasites (GMO cultivation applies to 80% of the country's cotton production). The setting up of three growth hubs, following on from the success of the Bagré hub, should enable the launch of new activities fostering economic diversification and attracting investment. Nonetheless, infrastructure shortcomings will still hamper activity, especially because of very limited electricity production and distribution. Ongoing public investments, supported by many World Bank schemes, should in part help tackle the rehabilitation and extension of the electric power grid. The stabilization of the political situation is expected to encourage a gradual resumption of private investment.
Inflation is likely to increase in 2016 with the recovery of private consumption, sustained by strong demographic growth and spending under the Strategy for Accelerated Growth and Sustainable Development (SCADD). Given the sensitivity of the price index to the volatility of prices for agricultural products, inflation could rise following poor harvests associated with bad weather conditions.
Ongoing budget and current account deficits
The budget deficit is expected to remain high in 2016. Government income is likely to remain low due to weak cotton and gold prices. The new mining code, which abolishes tax exemptions on mining company income and introduces a one-off tax of 27%, should however improve tax collection. On the other hand, spending, particularly social spending, will remain considerable, in the context of the second phase of the SCADD aimed at improving infrastructures and combatting poverty. The IMF's release of USD 32.3 million under the Extended Credit Facility should help fund this deficit. Debt remains at a moderate level, although the country is dependent on international donors.
The current account deficit is likely to remain high, with exports strongly affected by low gold and cotton prices. The reduction in the import bill, thanks to the moderation in oil and commodities prices, as well as the substantial flow of transfers, will not however offset the drop in export income.
Major challenges for the new president
The political scene in Burkina Faso has been particularly unstable with the popular uprising in October 2014, which swept Blaise Compaoré from power and was followed by the attempted military Coup d'état against the transitional government in September 2015. The election of Roch Marc Christian Kaboré with 53.5% of the votes cast in the first round of presidential elections on 29 November 2015, held with transparency according to the international observers, has raised hopes of a return to calm and democracy. The former right-hand adviser to Compaoré, he stepped down from office and from the leadership of the ruling Party for Democracy and Progress (CDP) to found his own party, the Movement of People for Progress Party (MPP), which won a relative majority in the National Assembly. The new president will, however, face major challenges in this country which is struggling to develop, despite substantial public development aid (9.5% of GNI according to the World Bank). The country is ranked 183rd out of 187 on the HDI and gross per capita income is USD 717, i.e. among the lowest in the world. High levels of poverty and unemployment, corruption and limited economic opportunities are, therefore, still a risk to political and social stability in 2016. The country's development will continue to be steered by the second phase of the SCADD, supported by the World Bank and the IMF. Poor infrastructure quality (transport, electricity, justice, health, education) contributes to a difficult business climate (143rd out of 189 according to the World Bank's Doing Business 2016 rankings). Ongoing tensions in Mali, due in particular, to the presence of Islamic terrorist groups, reinforce a sense of regional insecurity which penalizes investment.